SMRT – Phillip
Tough Year Ahead
• 1Q11 revenue was up 9.0% y-y to S$235.3m, net profit down 20.7% y-y to S$38.2m
• 1Q11 results were slightly below our expectation
• Downgrade our price target to S$2.18 from S$2.36
• Maintain Hold rating as SMRT is fully valued at this point of time
1Q11 results were slightly below our expectation
1Q11 revenue was up 9.0% y-y to S$235.3m, while net profit was down 20.7% y-y to S$38.2m. 1Q11 revenue was slightly below our expectation due to much lower maintenance revenue while other segments were within our estimates. Operating expenses were within what we have forecasted and we expect operating expenses to increase 5.5% in FY11E. Operating profit and net profit were down 20.2% and 20.7% to S$46.1m and S$38.2m respectively, due mainly to higher operating expenses. We think that the performance for the previous year (1Q10) is quite exceptional due to the low costs operating environment and stimulus from the government.
Advertising and rental segment continue to support its bottomline
Both the advertising and rental businesses continue to do well benefitting strongly from the improving economy, contributing about 38% to 1Q11 operating profit. These 2 segments with its high operating margin of 66% and 78% are likely to do well for the rest of the year. Advertising will benefit from the upcoming major events while rental will benefit from the addition of rental spaces from refurbished train stations and new circle line stations.
Outlook and estimates for the rest of FY11
We are lowering our revenue and net profit estimates by 2.2% and 6.8% respectively, to reflect the challenging operating environment and lower revenue from its maintenance arm. Circle Line daily ridership of 145,000 was way below the breakeven target of 200,000, and is expected to operate at a significant loss until stage 4 & 5 opens in 2011. Average fares could also be impacted by the implementation of distance fares from July’10.
Valuation and Recommendation
We are maintaining our Hold recommendation and cutting our fair value estimate to S$2.18 to reflect the below than expected ridership for Circle Line and lower revenue from its maintenance arm. SMRT will likely be impacted by higher electricity and labour costs for the rest of the year with an improving economy. SMRT is currently trading at 19.9X FY11E earnings, which is 19.8% higher than its historical average of 16.6X. We think that the share price for SMRT is fully valued at this moment, and we are advising investors to stay on the sidelines until we see an improvement in the performance of circle line. We derived our fair value using the DCF model and the model is based on a risk free rate of 2.78% and 1% terminal growth.
We are maintaining our Hold rating and downgrading our fair value estimate to S$2.18 from S$2.36.